DOYLE TRADING COMPANY’S LUNCH AND Q&A

Doyle Trading Company Lunch | December 3, 2012 | Princeton Club, NY, New York

W. Douglas Blackburn, Jr

W. Douglas Blackburn, Jr “The Dog That Didn’t Bark”

SILVER BLAZE

Sir Arthur Conan Doyle

W. Douglas Blackburn, Jr

Location of ILB Mines

W. Douglas Blackburn, Jr

RAILROADS/FORESTRY COMPANIES STEEL COMPANIES UTILITIES OIL COMPANIES FINANCE INTERNATIONAL STEEL QUERY: NEXT UP? INTERNATIONAL MINING HOUSES?

IN THE BEGINNING

W. Douglas Blackburn, Jr

NOT SO FAST INTERNATIONAL  COST  CURVE  FOR  COALS  DELIVERED  TO  ASIA  

   

TAX  POLICY  INCLUDING  CHANGES  TO  CAPITAL  GAINS  

   

LIABILITIES:  

           ENVIRONMENT:  AIR/WATER  

           UNITED  MINE  WORKER  TRUST  FUNDS  

           RETIREES/MEDICAL  

           RECLAMATION  

           BLACK  LUNG  

W. Douglas Blackburn, Jr

WHY M&A IS SO UNSATISFYING? A. KNOWLEDGEABLE (MINING) MONEY HELD IN AUSTERITY PROGRAMS B. NON-MINING MONEY: “COAL IS DEAD” C. WHY BUY AN UNCOMPETITIVE CLOSED PROPERTY IN A SHRINKING MARKET D. STRATEGY: PORTER MATRIX*

W. Douglas Blackburn, Jr

PORTER MATRIX* OPERATIONAL EXCELLENCE

PRODUCT DIFFERENTATION

DOMINATE NICHE

COMPETITORS THREAT OF NEW COMPETITORS THREAT OF SUBSTITUTES BARGAINING POWER OF SUPPLIERS BARGAINING POWER OF CUSTOMERS

W. Douglas Blackburn, Jr

HOTEL CALIFORNIA: “YOU CAN CHECK OUT BUT YOU CAN NEVER LEAVE”

W. Douglas Blackburn, Jr

“THE ONLY THING WORSE THAN 0UR BARRIERS TO ENTRY ARE OUR BARRIERS TO EXIT.” A. ARCH (ACI): ICG ASSET SALE FAILED IN 2012 B. CONSOL (CNX): ELKCREEK/ITMANN/AMONATE ASSET SALE FAILED 2011 C. ALPHA NATURAL RESOURCES (ANR): KY THERMAL PROPERTIES ASSET SALES

W. Douglas Blackburn, Jr

06-13

WHO IS SATISFIED WITH THEIR INVESTMENT?

A.  SEVERSTAL: $1B FOR PA LOW-VOL OPERATOR (PBS)

B.  ESSAR: $600M FOR WV MET/EKY THERMAL (TRINITY)

C.  ARCH (ACI): $3.4B FOR ICG

D.  ALPHA NATURAL RESOURCES (ANR): $7.1B FOR (MEE)

W. Douglas Blackburn, Jr

WHO IS SATISFIED WITH THEIR INVESTMENT ?

E.  MECHEL: $900M FOR BLUESTONE

F.  WALTERS ENERGY (WLT): $1.1B WRITEOFF FOR WESTERN FUELS G.  JAMES RIVER (JRCC): $475M FOR IRP

H.  CLIFFS (CLF): $757M FOR INR

I.  PEABODY: 10.5X FUTURE EBITA FOR MACARTHUR COAL (AUS)

W. Douglas Blackburn, Jr

WHY DON’T ACQUISITIONS WORK?

COMMODITY CYCLE

A. TIMING

W. Douglas Blackburn, Jr

WHY DON’T ACQUISITIONS WORK?

B.  INHERENT VOLATILITY OF COMMODITIES 6 MONTHS TO CLOSE; PRICE CAN CRATER C.  FINANCING VALUATIONS; BANKS DON’T LIKE THIS RISK D. POLITICAL RISK

W. Douglas Blackburn, Jr

WHY DON’T ACQUISITIONS WORK?

E.  RECENCY FALLACY

F.  DISCIPLINE: SAVE CASH DURING GOOD TIMES; BUY ASSETS AT BOTTOM

W. Douglas Blackburn, Jr

G.  CULTURE CLASH

H.  NEMESIS FOLLOWS HUBRIS

WHY DON’T ACQUISITIONS WORK?

W. Douglas Blackburn, Jr

W. Douglas Blackburn, Jr

W. Douglas Blackburn, Jr